/ 25 April 2021

Investment bonds: ‘The outcome is not measured by money but by impact’

The proposed JSE rules should help to protect investors from the Steinhoffs and Sagarmarthas.
(Delwyn Verasamy/M&G)

Investment returns are primarily measured in financial terms, but social impact bonds (SIBs) — also known as pay-for-success bonds — are shifting mindsets from this to returns that genuinely have an impact. 

However, in the 10 years since the first SIB was launched, only $424-million in total financing has been achieved. Though the bonds don’t have immediate or short-term returns, their impact can be felt, according to a report by Intellidex, a research and consulting firm.

Their research has shown that the government can use evidence from successful social impact bonds — which focuses on investing for results — to start putting money in structures that actually deliver on service delivery. 

These bonds are also referred to as outcomes-based contracts. They are investment tools where the private sector provides working capital upfront to NGOs to provide social welfare services. Only when the project is a success, does the government pay investors their returns. The bonds started in 2010 in the UK and have mushroomed in other parts of the world. 

Intellidex traced the trajectory of South Africa’s first SIBs to see if the “hype” around them is justified.

The research looked at the Bonds4Jobs programme, which started in April 2018 and aimed to test alternative social delivery mechanisms for getting systematically excluded young South Africans into their first jobs. Because of Covid-19, it ended prematurely. 

However, according to Intellidex, the process was able to place 1 800 unemployed youth from disadvantaged backgrounds into relatively complex and well-paying jobs.

In August of the same year, the Impact Bond Innovation Fund (IBIF) was launched in Cape Town. The fund tested the efficacy of a home-based early learning programme for pre-primary school age children and their caregivers in low-income areas in the Cape Town metropolitan area. The fund ended in November last year, and it was able to deliver early learning services to roughly 4 000 children over three years. 

Zoheb Khan, the social economy research manager at Intellidex, explained that the successful SIBs could be helpful to the government by guiding it to put money in models that worked to deliver services to the larger population.  

The bonds aimed to deliver results in areas where several similar programmes had not been effective while also bringing the investment capital, Khan explained. 

In the context of unemployment, he said that both the government and the private sector had been spending “billions” on skilling potential employees and offering post-secondary education. Despite this, there is still a high unemployment rate of 32.5%.

But the SIBs programmes focus on results and fixing what does not work to achieve desirable outputs. Khan said such programmes could also help the high unemployment rate, especially among the youth. Currently, 58% of people between the ages of 15 and 24 do not have jobs.

The IBIF’s total investment size was R7.5-million, while the Bonds4Jobs total investment was roughly R125-million across investment cycles. 

“This bigger amount balanced out the additional costs of the new and untested financial instrument. However, bigger investments imply more service delivery. And for meaningful social change to happen, the kinds of services delivered in the IBIF and Bonds4Jobs would need to be delivered to many more people’’, the report says.

While the sum is plenty, according to the report, in South Africa and elsewhere, commercial investors have found it challenging to commit to the SIBs. 

“One of the reasons for this is the transactions tend to be small, and not worth the disproportionate transaction costs,” it says.

The report also notes that the country’s social well-being policy framework is committed to welfare pluralism: the promotion of social welfare by multiple actors. 

The report says this “often manifests as an over-reliance by the state on NGOs. Therefore, social impact bonds could expand the private sector’s role in welfare provision and assist perennially underfunded NGOs that are providing essential services”.

However, Khan said most of these kinds of bonds appealed to philanthropic rather than traditional investment capital. 

Andrew Canter, the chief investment officer at FutureGrowth Asset Management, explained that it was because all other bonds are designed around “economic” outcomes.

“I will fund your business idea based on risk-sharing, the likelihood of you making or losing money”. 

However, social impact bonds are geared explicitly toward outcomes that are only “economic” in the long term. The outcome is not measured by money but by impact. 

This difference has made it difficult for the bonds to gain traction. 

Canter said these are fairly complex transactions, with several contracting parties, and usually relatively small. But it is also a big leap for funders to learn to measure social outcomes instead of economic outcomes.  

“It’s a bit of a mind-bender … so the market is still nascent,” he explained. 

He added that it was “satisfactory” because they can deliver real, on-the-ground, strong social outcomes if done properly.

Khan said even though these bonds were a novelty in the country, he is not certain that the government is fully committed to them. 

He said the presidential youth employment intervention took some principles of one of the impact bonds, where they realised that if you have a demand-based training model and work with employers, you can detail match unemployed people with available opportunities based on their skills.

However, he said in one of the bonds they looked at, the government had not committed to another round. He said it could be because of the treasury’s austerity budget and SIBs might not have been considered a priority.

“Government needs to see the value in investing in quality services that work,” Khan said.